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March Madness on a Different Court: Fantasy Sports and New York AG Reach Temporary Compromise

March 23rd, 2016

On Monday DraftKings, Inc. and FanDuel, Inc., the two largest providers of Daily Fantasy Sports (“DFS”) in the US, announced an agreement with New York Attorney General Eric Schneiderman (the “NYAG”) in connection with the ongoing DFS litigation. The agreement has the potential to end the dispute over whether DFS constitutes illegal gambling in New York while leaving intact the NYAG’s claims that DraftKings and Fanduel engaged in false advertising.

Background
For the past four months, DraftKings and FanDuel have been embroiled in litigation with the NYAG. After receiving a cease and desist letter from the NYAG, DraftKings and FanDuel sued the NYAG asking a court to confirm that DFS was not illegal gambling. The NYAG then filed his own enforcement action against DraftKings and FanDuel claiming that DFS was illegal gambling and that both DraftKings and FanDuel had engaged in false advertising in violation of New York law. In December, a New York State Supreme Court Justice granted a preliminary injunction halting DFS play in New York and holding that DFS constituted illegal gambling. The Court’s order was subsequently stayed by the Appellate Division, First Department pending appeal.

What the agreement says
The agreement provides that DraftKings and FanDuel will stop accepting DFS entries from players based in New York pending the outcome of the appeal in September. However, if the New York legislature legalizes DFS before June 30, 2016 (the last day of the 2016 legislative session) the agreement provides that DraftKings, FanDuel and the NYAG will drop all claims relating to whether DFS constitutes illegal gambling. Further, if the NYAG prevails on appeal, DraftKings and FanDuel will drop all lawsuits and future appeals. In exchange, the NYAG will discontinue all claims against DraftKings and FanDuel, except for the claims relating to false advertising. Finally, if DraftKings and FanDuel are successful on appeal, the parties “shall continue discussions” regarding the litigation. The agreement does not include any admission that DFS is currently illegal in New York.

Why this matters
The compromise is important for two reasons. First, it highlights the potential likelihood that any final resolution to the DFS debate in New York will be accomplished through legislation and not the courts. In addition to New York, 22 other states are currently considering legislation to regulate DFS and two states have already passed such legislation. Thus, any company interested in working in the DFS space will likely need to understand the regulatory framework. Second, the settlement makes clear that the NYAG’s position on DFS generally, and his allegation that DraftKings and FanDuel engaged in false advertising, are separate. In other words, even if DFS is legalized, how companies advertise and promote it will continue to require careful scrutiny to ensure that the ads and promotions do not run afoul of New York’s false advertising laws. At present, it is unclear how the NYAG’s false advertising claims will be resolved.